FEARS OF a severe credit crisis and a global sell-off in financial markets is expected to lead to a cut of more than 1 per cent in the main United States interest rate today. The Federal Reserve already cut a key interest rate by 0.25 per cent on Sunday.
Today's expected cut is a response to yesterday's steep falls in European and Asian markets following the emergency sale of Bear Stearns, Wall Street's fifth biggest investment bank, for $2 a share. The sale price represented just 1 per cent of its value two weeks ago.
The Fed underwrote the purchase of Bear Stearns by JP Morgan Chase, which announced that half of Bear Stearns's 14,000 employees would be laid off.
In the biggest expansion of its lending authority since the 1930s, the Fed announced on Sunday that, for at least the next six months, securities dealers could borrow from it on much the same terms as banks. However, the move initially appeared to spook markets further.
In Asia and Europe shares tumbled, led by financial stocks, and the dollar plumbed fresh lows against the euro amid growing concerns that other financial institutions could suffer the same fate as Bear.
US President George Bush insisted that his administration was "on top of the situation".
"One thing is for certain, we're in challenging times. But another thing is for certain - that we've taken strong and decisive action," he said. "Our financial institutions are strong and our capital markets are functioning efficiently and effectively. We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets."
JP Morgan's acquisition of Bear Stearns prevented the collapse of the ailing bank, which plunged into crisis last week. Other banks had stopped lending Bear Stearns money because of its exposure to the subprime mortgage crisis.
As rumours spread through Wall Street about the next bank to topple, another investment bank, Lehman Brothers, sought to reassure investors about its own financial situation. "Our liquidity position has been and continues to be very strong," the bank said in a statement.
Irish banks endured a tough trading day in Dublin. Anglo Irish Bank fared worst, losing 15 per cent or almost €1 billion of its value as rumours about its potential exposure to bad debts circulated. Anglo's shares were down by as much as 22 per cent at one point in the day's trading. It closed at €6.96 and has shipped some 60 per cent of its value over the past 10 months.
AIB's shares declined by 6 per cent, while Bank of Ireland and Irish Life & Permanent were down by almost 5 per cent each. In total, some €3.5 billion was wiped off the value of Irish shares in Dublin.
Taoiseach Bertie Ahern, who was in Washington for the traditional St Patrick's Day shamrock ceremony at the White House, warned that Bear Stearns may not be the last victim of the turbulence that has gripped financial markets.
"It is clearly an international issue, not just an Irish issue. It would seem that the sale of Bear Stearns, a company that was worth $120 a share in the fall, is now sold for $2 a share. If you were to dream that up nobody would believe you," Mr Ahern said.
"These are hugely difficult situations. One would get the sense - maybe I am wrong - that this has not washed out of the system by a long shot. There are going to be some more difficult times," he added.
Mr Ahern said that the fate of Bear Stearns showed that there was a great deal of instability on Wall Street, adding that Ireland was fortunate in having only limited exposure to the subprime mortgage market. "What has happened is that the banking system was awash with money and then people set up a range of these products, which I am sure were all very interesting. But where was the security that gives the investor certainty?" he said.